The British left is a disgrace. In order to stabilise public finances, the coalition prime minister, David Cameron, clearly intends to challenge the ideological basis of our public services. Few corners are to be immune. The Liberal Democrats are riding the tiger. The left is nowhere. Like an arthritic Colonel Blimp, it merely cries, "Yah boo. All is well. The old ways are best."

This is on top of Andrew Lansley's bid to dismantle tottering NHS bureaucracy. He wants to do it not by slicing budgets, which seldom works, but by removing layers, which might. He has decided to give money for hospital care to frontline GPs, saying to the public: your health is your business; here is the money, but discuss with your GP how to spend it.

As a housing association trustee in the 1980s, I marvelled at the extravagance of giving people from a council list of "local and needy" a townhouse for life, removing it from the social housing stock. We were not making a dent in homelessness – surely the purpose of state subsidy – but selecting lucky people, mostly mothers, at a moment of financial stress and giving their families a subsidised house for life.

Council tenants were even luckier. They could bequeath the bonanza to husbands and children, irrespective of wealth, or convert it into capital through right-to-buy. As a way of relieving housing poverty, the system was grotesquely expensive and bore no relationship to ongoing need. There was no "stock" of social housing, rather a passing trickle.

I can't recall a Labour politician ever questioning this system. It was holy writ, handed down from the Victorians. The left reacts to Cameron like an admiral whose pet aircraft carrier has been scrapped. It howls. With some five million people on waiting lists, Shelter said tenure security was not "a big question" and the Chartered Institute of Housing said housing subsidies should not be seen as "a last resort". So what are they?

These three classic realms of welfare – housing, health and social transfers – were protected by Thatcher, Blair and their followers. Such articles of the faith as universal entitlement, nationwide benefit levels, centralised administration and distaste for means-testing have hardly been challenged in half a century. Spending soared under left and right, and ran out of control under Gordon Brown. Even when Margaret Thatcher cut council rent subsidies, housing benefit rose by an equivalent amount.

Tory governments railed against benefit cheats, invalidity fraud and unmarried mothers in council houses, but they dared not change the system. The same visceral terror resurfaced with Cameron's kneejerk rejection of an end to the wartime milk subsidy to infant schools. With child obesity on rampant, nanny Cameron dared not even suggest replacing the milk with an apple.

He has sent a grim message to ministers: some cows are more sacred than others, especially if they give children milk. The list of the protected grows more eccentric by the week. Infant milk joins Trident missiles, Olympic horses, wind farmers, aid to Indian taxpayers and "free school" yuppies. At least the list is short. Beyond those in this state of grace, everything is up for grabs.

For whatever motive – and reducing a budget deficit is hardly dishonourable – Cameron is seeking to redefine the individual's relationship with the state, more radically than anyone since the 40s. I may think the government should stall on some cuts, such as cash benefits, while the economy is stagnant. But when state revenues are static, claims rising and government indebtedness gargantuan, only those blind to reality refuse to discuss the structural basis of public spending.

From Labour we get not a peep. I have missed the draughty-hall hustings to which candidates for the leadership are traipsing this summer, but I have followed them on radio, television and blogs. They are like cement congealing round a mafia victim's feet. Nor do I imagine these events represent the entirety of conversation on the left. But nowhere has Cameron's challenge been really met, for or against. All we hear is a 1980s throwback to deploring "Tory cuts" and "defending public services".

David and Ed Miliband, Ed Balls, Andy Burnham and Diane Abbott can only blow a collective raspberry. They rabbit on about who said what during the Iraq war or the credit crunch. Like Stalinist courtiers they accuse each other of varying degrees of disloyalty to Blair and Brown, asking who said what, where and when. They try to curry favour with public sector unions, most of whom are way ahead of them in realism on government services. The candidates are intellectually barren.

Even on the left's own terms, the coalition is challenging the road ahead for redistributive socialism. It is raising the spirits of Beveridge and Crosland. What should national insurance mean with an ageing population? How can we afford "higher education for half the people"? Which services could be paid for by the individual or discrete communities, rather than a universalist government? Labour's answer is metronomic: leave it all to the state … the state … the state. This answer has run into the sand. It has driven the country into a worse plight than Greece or Spain.

To do Nick Clegg and his Lib Dems justice, they have at least engaged. Through the happenstance of the electoral system, they are joined in the most vigorous debate British politics has seen in half a century. Labour knew last year that some such crisis was in the offing; there were signs of Alistair Darling and others steeling themselves for the fray. Now the left has removed itself to doze on planet 1945. One day it must return.